How to build the down payment for your home loan
Updated: Jan 29, 2020
Roti, kapda aur makan – food, clothes and a home. This is the quintessential dream sold to us by our parents, society in general and Bollywood in particular.
And if you have bought into this dream, you don’t need to slog for decades to be able to buy your dream home. All you need is the down payment and then you can let the banks help you with a home loan which also translates to tax savings. Having a sizeable downpayment can help you ease the burden of a home loan. The question now is how do I build my down payment corpus?
How much can I save every month
A general rule of thumb to follow is that you can afford to spend about 28% of your earnings on your home needs. So if you earn one lakh a month, you are looking as spending or saving ₹28,000 per month for your home. This could be rent or EMI or the amount you can comfortably save per month to build your down payment.
Why must I have a big down payment
You need to have a solid amount for a down payment so that the loan you take is not too much. Given the floating rates of interest, paying back a home loan with a hefty interest component can take a big bite from your salary. The smaller the loan, the quicker you can pay it off. Also, maybe advisable to take a fixed-rate loan.
When it comes to saving for a home, it is better to avoid high-risk investments since that down payment amount is non-negotiable and you will need it at you have set for yourself.
You can be adventurous in a long-term investment plan where there are adequate opportunities for market correction – meaning the fund adjusts to the market dips and spikes without affecting your final take-out. But if you are in a mutual fund for the specific purpose of making a down payment a few years down the line, opt for one with low-risk and low to medium returns.
Consolidate your savings
If you are looking for a house that costs ₹1 crore, you will need about 20% of that amount for the down payment. With a target of ₹20,00,000 and a saving capacity of ₹28,000 per month, you could take 7.3 years to reach that sum. To fast track to your goal, consolidate your other savings.
This could be various savings certificates;
You can also make a partial withdrawal from your PPF account.
I used my PPF account to prepay my home loan and finally take possession of my home documents. This could also be a good time to cut your losses and exit investments that are not giving you the returns you expected.
I was also able to cash in on some old savings that I had completely forgotten about. If you are as disorganised as I was, you too may be able to find that Kisan Vikas Patra or National Savings Certificate or government bond that you have forgotten about.
Ask your boss
Your employer is also a good source for asking for money. Ask for a raise – but base your request on your performance and not on the fact that you want to buy a house. You can also make a partial withdrawal from your office provident fund.
Now you need to look within and get out of spending mode to saving mode.
Live a frugal life. Learn the value of minimalist living.
Cut down of wasteful expenses.
Go online and sell what you don’t need. Instead of buying new clothes, get the most out of your existing wardrobe.
Save eating out for special occasions and learn the value of good home cooking. Avoid impulse buying.
Learn to switch off the air-conditioner when you leave the room and other such small changes that could have an impact on your money.
The bottom line is that buying a home is the ultimate in adulting. So if you are ready for it, go about it and enjoy the feeling of pride that comes with being a homeowner.
At Basis, we can help you create this corpus and save towards it, find it on the new goal-based investing features on our app. Download here to get started.